She is already familiar with the classic EOQ formula, of
Q= v2CD / H
WhereC = cost of issuing a new purchase order or cost of a changeover in the manufacturing plant;D = demand per period; andH = carrying cost of inventory
To assess the expected level of average inventory, the formula is
Average inventory = Q / 2
where Q = EOQ from the EOQ formula.
In a traditional forecast-driven manufacturing operation, assume the following:
- Monthly sales or demand = 1,000 units
- Changeover cost = $500
- Inventory carrying cost = 30% of inventory cost
- Average cost per unit of inventory = $10
Let the Global Supply Chain Manager and her purchasing department know the following:
- In a traditional forecast driven manufacturing operation,
- What would be the EOQ?
- What would be the average inventory level in units, and in dollars?
- In a demand-based, synchronous manufacturing operation, assume C = $10, with the changeover time reductions seen in synchronous manufacturing.
- What would be the new EOQ?
- What would be the new average inventory level in units, and in dollars?
- Assuming the carrying cost of inventory is 30%, what is the dollar savings in inventory needed?
- What conclusions can you reach about the impact on the company’s overall ROI when switching to demand-based, synchronous manufacturing?